I also agree with the Court of Appeal that, if it had been necessary to do so, which it is not, it would have been right to regard the treatment of Mr. Yllera and Mr. and Mrs. O'Connor, under section 14(4) of the Act of 1980 as contributing to the seriousness of the breach.

I, therefore, conclude that the United Kingdom's breach of its Community obligations by imposing and applying the conditions of nationality, domicile and residence in and pursuant to the Merchant Shipping Act 1988 was a sufficiently serious breach so as to entitle the respondents to compensation for damage directly caused by that breach. I consider also that the United Kingdom was in breach of community law by failing to give effect to the order of the President of the European Court of the 10 October 1989 until 2 November 1989 and that this also constituted a serious breach of community obligations which would, had they not succeeded on the first ground, have entitled Rawlings (Trawling) Limited to compensation for damage directly caused by that breach.

I would accordingly dismiss the appeal.

LORD NICHOLLS OF BIRKENHEAD

My Lords,

I have had the advantage of reading a draft of the speeches of my noble and learned friends Lord Slynn of Hadley and Lord Hope of Craighead. For the reasons they give, I too would dismiss this appeal.

LORD HOFFMANN

My Lords,

In passing the Merchant Shipping Act 1988 the United Kingdom (acting by its legislature) took a calculated risk. It knew that there was, to put the matter at its lowest, doubt over whether the legislation contravened fundamental principles of Community law. The European Commission had expressed the clear view that it infringed the rights of establishment of citizens of other member states and their right to invest in United Kingdom companies. The U.K. government knew that the effect of the legislation would be to cause substantial losses to the owners of boats which they could no longer use for fishing under the British flag. It could have delayed implementation of the legislation until there had been an authoritative ruling on whether it was lawful. Instead, it chose to brook no delay and successfully appealed against a decision of the Divisional Court in March 1989 which would have suspended the operation of the Act until the matter had been determined. In the end, the United Kingdom was held to have been wrong. The judgment of the European Court in July 1991 held unequivocally that the Community rights of the boat owners had been infringed.

The question is now whether they are entitled to compensation. The Court of Justice has ruled [1996] Q.B. 404, that this depends upon whether the breach of Community law was sufficiently serious. It accepts that in principle the area in which the United Kingdom was legislating was one in which it had a wide discretion. In such a case, the breach of Community law will be sufficiently serious only if the legislature "manifestly and gravely disregarded the limits of its discretion:" See para. 55

I agree with my noble and learned friend Lord Slynn of Hadley that the actions of the United Kingdom can properly be so described. There is no doubt that in discriminating against non-U.K. Community nationals on the grounds of their nationality, to which the requirements of domicile and residence were added to tighten the exclusion of non-U.K. interests, the legislature was prima facie flouting one of the most basic principles of Community law. The responsible Ministers considered, on the basis of the advice they had received, that there was an arguable case for holding that the United Kingdom was entitled to do so. In that sense, the Divisional Court has held that the Government acted bona fide. But they could have been in no doubt that there was a substantial risk that they were wrong. Nevertheless, they saw the political imperatives of the time as justifying immediate action. In these circumstances, I do not think that the United Kingdom, having deliberately decided to run the risk, can say that the losses caused by the legislation should lie where they fell. Justice requires that the wrong should be made good.

The Solicitor-General argued that the breach of Community law was excusable on the grounds that the government acted upon legal advice. He relied in particular on the written opinion given by Mr. Francis Jacobs Q.C. and others in February 1987. I do not think that a member state can rely simply upon the fact that its relevant organ of government acted upon legal advice. It is a basic principle of Community law that in considering the liabilities of a member state, all its various organs of government are treated as a single aggregate entity. It does not matter how their responsibilities are divided under domestic law or what passed between them. Likewise, as it seems to me, the process of advice and consultation undertaken within a member state by its responsible organs of government is irrelevant. Advice received from Community institutions is another matter: as the Court of Justice points out in its judgment on the reference in this case (Brasserie du Pecheur S.A. v. Federal Republic of Germany and Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. (No. 4 (Cases C-46 and 48/93) [1996]Q.B. 404, 499, para. 56), "the fact that the position taken by a Community institution may have contributed towards the omission" is a relevant matter to take into account in deciding whether a breach was sufficiently serious. But the question of whether the error of law was excusable or inexcusable is an objective one and the excuses must be considered on their own merits.

When one comes to consider the strength of the United Kingdom's arguments to justify discrimination against nationals of other member states, it seems to me that there was a fatal divergence between the rhetoric which the Government used to describe the problem and the solution which it adopted. The Act was said to be to ensure that "U.K. quotas were reserved for U.K. fishermen." Foreign nationals, mainly Spanish, were said to be "quota hopping", using the British flag to fish against the U.K. quota. The image conveyed was of disappointed trawlermen from Newquay or Grimsby, returning with empty holds because the fish which were part of the U.K. quota had been taken by Spanish vessels flying the British flag and landed at Santander. There is a dispute about whether this presented a fair picture of the reality which the Divisional Court found it unnecessary to resolve. Neither do your Lordships, because the provisions of the Act went far beyond anything which was necessary to deal with such a situation. The system of quotas was intended, as stated by a recital to Council Regulation (EEC) No. 170/83 of 25 January 1983, to "safeguard the particular needs of regions where local populations are especially dependent on fisheries and related industries." The Court of Justice has always recognised that member states are entitled to take any necessary and appropriate measures to ensure that there is a "real economic link" between operations of vessels fishing against the national quota and the local populations dependent on fishing and related industries: see, for example, the judgment of the Court of Justice in The Queen v. Ministry of Agriculture Fisheries and Food, Ex parte Jaderow Ltd. [1990] 2 Q.C. 193, 222, para.27. But the terms of the Act were inappropriate to achieve this object because they were principally concerned, not with the operations of the vessels, but with the nationality, domicile and country of residence of the shareholders in the companies which owned them. One is bound to ask how it could be thought to have made any difference to the interests of the population of an English fishing port whether the shares in a company owning a vessel fishing out of that port were owned by a U.K. national and domiciliary resident in London or a Spanish national and domiciliary resident in Madrid.

For these reasons, as well as those given by my noble and learned friends Lord Slynn of Hadley and Lord Hope of Craighead, I would dismiss the appeal.

LORD HOPE OF CRAIGHEAD

My Lords,

I have had the advantage of reading in draft the speech which has been prepared by my noble and learned friend, Lord Slynn of Hadley. I agree with it, and for the reasons which he has given I too would dismiss the appeal. I wish merely to add these observations to what he has said.

As the Solicitor General said at the outset of his argument, the question whether the breach by the United Kingdom of its Community obligations entitles the respondents to damages raises issues of fact as well as issues of law. It seems to me that it is the issues of fact that are determinative of the question which is before us in this case. I am not persuaded that the Divisional Court and the Court of Appeal were in error in their assessment of these issues.

In Brasserie du Pecheur SA v. Federal Republic of Germany and Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. (No. 4) (Cases C-46/93 and C-48/93) [1996] Q.B. 404, 498, para. 51 ("Factortame III") the European Court of Justice set out the conditions for the entitlement to damages in these terms:

"In such circumstances, Community law confers a right to reparation where three conditions are met: the rule of law infringed must be intended to confer rights on individuals; the breach must be sufficiently serious; and there must be a direct causal link between the breach of the obligation resting on the State and the damage sustained by the injured parties."

The first of these three conditions, which raises an issue of law, was held in Factortame III, para. 54 to have been satisfied. This was on the ground that it was manifest that articles 30 and 52 of the E.C. Treaty (now articles 28 and 43 E.C.) were both intended to confer rights on individuals. The third condition, which relates to causation, was held to be a matter for the national courts to determine: para. 64. This raises an issue of fact which must be deferred for consideration at a later date. It will have to be considered in the light of the evidence. The dispute at this stage relates to the second condition. Was the breach "sufficiently serious"?

In para. 55 of its decision in Factortame III the European Court, following the approach it has taken as to the liability of Community institutions under article 215 E.C. (now article 288 E.C.) in the exercise of their legislative activities, said that the decisive test for finding that a breach of Community law is sufficiently serious is whether the member state "manifestly and gravely" disregarded the limits on its discretion. In the following paragraph, in a list which I would regard as helpful but not exhaustive, six factors were mentioned for consideration by the competent court. Among these are the clarity and precision of the rule breached, whether the infringement was intentional or involuntary and whether any error of law was excusable or inexcusable. In various passages elsewhere in the judgment the Court expressed its opinion about the nature of the breach for the consequences of which the respondents are claiming damages. But I would not be inclined to attach much importance to these expressions of opinion, because in para. 58 of the judgment the Court made it clear that it was for the national courts to assess the seriousness of the breach. The national courts have the sole jurisdiction to find the facts in the main proceedings. It is for them to decide how to characterise the breaches of Community law which are in issue.

It is a novel task for the courts of this country to have to assess whether a breach is sufficiently serious to entitle a party who has suffered loss as a result of it to damages. The general rule is that where a breach of duty has been established and a causal link between the breach and the loss suffered has been proved the injured party is entitled as of right to damages. In the present context however the rules are different. The facts must be examined in order that the court may determine whether the breach of Community law was of such a kind that damages should be awarded as compensation for the loss. The phrases "sufficiently serious" and "manifestly and gravely" which the European Court has used indicate that a fairly high threshold must be passed before it can be said that the test has been satisfied.

It seems to me that three factors emerge from the facts of this case which justify the conclusion that the breach was sufficiently serious to entitle the respondents to damages. The first relates to the subject matter of the breach. In this regard I agree with the Court of Appeal [1998] EuLR 456, 476D that the three conditions of nationality, domicile and residence in section 14 of the Merchant Shipping Act 1988 must be treated, in the context of the provisions of that Act, as cumulative. It is plain that we are dealing in this case with the adoption and retention in our national law of measures which were contrary to the obligations of the United Kingdom under the E.C. Treaty relating to nationality and domicile: see article 52 E.C., read with articles 5 and 7 (now article 43 E.C., read with articles 10 and 14). These are key areas of the Treaty in regard to the free movement of persons and the right of establishment. This is not a case where it can be said that the Treaty obligations were obscure or that they related to matters which were of minor importance. I would not go so far as to say, with the Court of Appeal at p. 476B, that the direct breach of a fundamental principle of the Treaty will almost inevitably create a liability in damages. But the nature of the breach will always be a highly relevant factor in the assessment. The more fundamental the breach, the easier it will be to regard it as sufficiently serious.

The second factor relates to the potential of the breach for causing damage to those who are likely to suffer loss as a result of it. The Divisional Court [1997] Eu.L.R 475, 503B-C. held that the stated and actual purpose of the Government was to protect indigenous British fishing interests, not to injure the respondents, although that might be the effect of the policy. But it was clear that once the law took effect it would almost certainly cause loss to those who were affected by it, and that their loss was likely to be both serious and irremediable. The respondents were to be deprived of their right to fish in United Kingdom waters. They had established themselves here, and for all practical purposes they had nowhere else to go to continue their livelihood. This potential for obvious and immediate damage leads naturally to the conclusion that, even though the Government were acting in good faith, this was a serious breach and that the respondents ought to be entitled to compensation by way of damages if the other two conditions laid down by the European Court are satisfied.

The third factor relates to the methods which were used to achieve the result. The Government chose to resort to primary legislation. This made it impossible for the respondents to obtain interim relief against it under domestic law as it then stood. It then chose to impose a short and inflexible transitional period for bringing the legislation into effect. No interval of time was allowed, in the event of its being challenged, for the issues of principle to be determined by means of a preliminary reference. This was despite the fact that by the time the legislation was introduced the Commission's stance on the matter was well known and the point was by now clearly open for argument. The interests of those who were likely to be affected by the legislation were subordinated to those of the Government. A deliberate decision was taken to proceed in this way, albeit in good faith, in preference to safeguarding the interests of those who were entitled to the protection of the treaty obligations should the legal advice on which the Government was proceeding turn out to be wrong.

This then was more than a trivial or technical breach of the Community obligations. The words "manifest" and "grave" are not easy adjectives to apply in this context. But I have no difficulty at all in seeing what was done here as a breach which was sufficiently serious to entitle the respondents to compensation by way of damages for such losses as they can show flowed directly from the breach. If damages were not to be held to be recoverable in this case, it would be hard to envisage any case, short of one involving bad faith, where damages would be recoverable.

The Solicitor General laid great stress on the point made by the European Court that one of the factors which could be taken into account in the assessment of seriousness was whether or not the breach was excusable. Much importance was attached by him to the legal advice which had been taken and received. But I was not impressed by this argument. The good faith of the Government is not in question. It is not suggested that it proceeded without taking advice, or that it acted directly contrary to the advice which it received. Nor is it suggested that there was a lack of clarity in the wording of the relevant provisions of the Treaty or that there was some other point which might reasonably have been overlooked. So this case cannot, I think, be described as one which went wrong due to inadvertence, misunderstanding or oversight. The meaning of the relevant articles was never in doubt. The critical issue related to the interaction between these articles and the Common Fisheries Policy. On this matter there was clearly a serious issue to be resolved. Different views had been expressed within government, and the Commission was known to have taken a view contrary to that which the Government decided to adopt.

I do not wish to be taken as suggesting that the Government should have deferred to the views of the Commission on this matter. It was clearly entitled to take a different view and to decide upon its own course. But the Commission's role, while not conclusive, was important. It was seized of the matter, and it had stated its position in terms which were unequivocal. The decision to legislate was taken by the Government in full knowledge of the risks. I find it impossible to describe that decision as having been based on an oversight or an error of law which was excusable.

LORD CLYDE

My Lords,

I also agree that this appeal should be dismissed and it is only on account of the importance of the case that I would add some observations of my own.

It was established in Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. [1992] Q.B. 680 that the requirements for registration of fishing vessels contained in the Merchant Shipping Act 1988 were contrary to the provisions of the treaty and unlawful and invalid in community law. The dispute now concerns the claim for damages which the respondents have brought against the appellant. In circumstances such as the present the European Court of Justice has identified the conditions which require to be met for conferring under Community law a right to reparation against the legislature of a member state following upon a breach by that legislature of community law. In para. 51 of their judgment in the combined cases of Brasserie du Pecheur S.A. v. Federal Republic of Germany and Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. (No. 4) (Cases C-46 and 48/93) [1996] Q.B. 404, 499 ("Factortame III") the court prescribed three conditions which required to be met. First, the rule of law infringed must be intended to confer rights on individuals; secondly the breach must be "sufficiently serious," and thirdly, there must be a direct causal link between the breach of the obligation and the damage. The first of these is not in dispute and the third is matter to be resolved at a later stage. The only question in the present appeal is whether the breach was "sufficiently serious."

In developing the conditions under which liability may arise the court has looked to its jurisprudence both in relation to article 215 and also in relation to the liability of Community institutions. From this has emerged the recognition of the relevance both of the practical and legal problems involved in particular cases, and also of the extent of the discretion open to the party in breach. In some cases there may be no discretion left to the state, and where there is an absolute duty to act a liability for a failure to act may more readily arise. In other cases there can be a degree of discretion and the wider the discretion the less readily should a claim for damages be available. The rationale for this strict approach, as appears from p. 498, para. 45 of the judgment in Factortame III, is the consideration that governments should not be hindered from passing legislation in the general interest of the community which may adversely affect individual interests by the prospects of actions for damages.

It has been recognised by the European Court of Justice that in the circumstances of the present case the United Kingdom legislature had a wide discretion. In p. 499, para. 49 of the judgment the court explains that the legislation was concerned not only with the registration of vessels but also with the regulation of fishing. The former of these falls within the jurisdiction of the member states, and the latter, concerned with the implementation of the common fisheries policy, leaves a margin of discretion to the member states.

Where member states act in a field where there is a wide discretion the situation should be comparable with that of the community institutions in the implementation of community policies. The conditions under which liability may arise should also be comparable.

Where legislative measures are the result of choices of economic policy it is only exceptionally and in special circumstances that liability for those measures should arise. That principle was recognised in para. 5 of the judgment of the court in Bayerische HNL Vermehrungsbetriebe G.m.b.H. & Co. KG v. Council and Commission of the European Communities [1978] E.C.R. 1209. In that case it was held (in para. 6 of the judgment) that the Community does not incur liability "unless the institution has manifestly and gravely disregarded the limits on the exercise of its powers." The language appears to echo a passage in the argument presented by the Council (at p.1216 of the report) that "It must be a serious breach which is particularly blatant, a particularly clear infringement and a manifest grave violation of the basic content of a principle." In Factortame III [1996] Q.B. 404, 499, para.55 the court stated that "the decisive test for finding that a breach of Community law is sufficiently serious is whether the member state or the Community institution concerned manifestly and gravely disregarded the limits on its discretion."

While the application of the test may not require any too precise analysis, its ingredients may deserve to be identified. That the limits on the discretion have to be disregarded suggests that something more than a mere excess of power is required. More particularly the disregard must be manifest. From p. 499 para. 59 of the judgment in Factortame III it is said of one of the provisions in the German legislation in the Brasserie case that "it would be difficult to regard the breaches of article 30 by that legislation as an excusable error, since the incompatibility of such rules with article 30 was manifest in the light of earlier decisions of the court. . . ." Legislation which is contrary to established case law is thus one example of a manifest breach. It is to be noted that in that passage the court refers to excusability as covering either the case where the breach is not manifest or, which would in such an event follow, where the breach was not sufficiently serious. The Solicitor-General sought to use the concept of excusability as the touchstone for freedom from liability. But it may be preferable to hold to the language of the "decisive test" rather than resort to different expressions which may less exactly reflect the principle, unless the word is clearly used simply as a label to represent the converse of a sufficiently serious breach.

In addition to being manifest the disregard of the limits of the discretion must be grave. This points to some significant and substantial characteristic, as where the breach is of a basic principle of Community law. As can be seen from the judgment in Factortame III [1996] Q.B. 404, 499, para. 57, persisting in an infringement despite a judgment finding the infringement to be established would be an example of a sufficiently serious breach. The disregard of the limits of the discretion would be manifest by virtue of the judgment and it would be grave in respect of the persistence in the infringement.

But it may be too narrow an approach in the practical application of the test to make the distinction between the categorisation of what is manifest and of what is grave. A broader approach is perhaps to be preferred. Moreover the application of the test laid down by the court comes eventually to be a matter of fact and circumstance. In the judgment the court [1996] Q.B. 404, 499, para. 56 lists some of the factors which may be taken into consideration. But that list does not pretend to be complete or exhaustive. It would doubtless be premature to attempt any comprehensive analysis. But it appears to be possible to identify some of the particular considerations which may properly be taken into account, although the relevance in particular cases and the weight to be given to them in particular circumstances may obviously vary from case to case. It is to be noted that liability does not require the establishment of fault as, to use the language of the Advocate General in his Opinion [1996] Q.B. 404, 476, para. 90, "a subjective component of the unlawful conduct." It is on the objective factors in the case that the decision on liability requires to be reached. No single factor is necessarily decisive. But one factor by itself might, particularly where there was little or nothing to put into the scales on the other side, be sufficient to justify a conclusion of liability. Some of those factors can be identified as follows.

1. In paragraph 38 at p. 497 of its judgment in Factortame III the court has affirmed that the liability of a member state for damages for a breach of community law depends on the nature of the breach. This gives rise to consideration of a number of more particular matters, one of the most prominent of which is the importance of the principle which has been breached. Thus in Mulder v. Council and Commission of the European Communities [1992] E.C.R. 1-3061) the court founded upon the fact that the breach in question was of a general and superior principle of Community law, namely the protection of legitimate expectations.

2. Another consideration relating to the nature of the breach is the clarity and precision of the rule breached. If the breach is of a provision of Community law which is not framed in clear language and is readily open to construction, then the breach may be the less serious. Questions of the clarity of the rule may require to be associated with questions of the complexity of the factual situation. The application to complex facts even of a rule which is reasonably clear in itself may render the situation open to doubt.

3. Closely related to that last consideration is the degree of excusability of an error of law. That could arise on account of the ambiguity of a Community text. It could also arise out of the uncertainty of the law in some particular area, where there is little or no guidance and evident room for difference of opinion.

4. Another factor relating to the clarity of the law is the existence of any relevant judgment of the court on the point. If there is settled case law, the failure to follow it may add to the seriousness of the breach. On the other hand if the point is novel and is not covered by any guidance from the court then liability should less readily follow.

5. It is also relevant to look at the state of mind of the infringer, and in particular whether the infringer was acting intentionally or involuntarily. A deliberate intention to infringe would obviously weigh heavily in the scales of seriousness. An inadvertent breach might be relatively less serious on that account. Liability may still be established without any intentional infringement. More broadly, the purpose of the infringer should be considered. If the purpose was to advance the interests of the Community a breach committed with that end in view might be seen as less serious than one committed with the purpose of serving merely national interests.

6. The behaviour of the infringer after it has become evident that an infringement has occurred may also be of importance. At the one extreme the immediate taking of steps to undo what has been done and correct any error which has been committed may operate to mitigate the seriousness of the breach. At the other extreme a persistence in the breach, the retention of measures or practices which are contrary to Community law, especially where they are known so to be, will add to the seriousness of what has been done. Indeed, in paragraph 37 of the judgment in Factortame III the court stated that persistence in a breach despite a judgment finding an infringement or clear case-law on the point, "will clearly be sufficiently serious."

7. Another aspect relates to the persons affected by the breach. In the Mulder case [1992] E.C.R. I-1029 the court also founded upon the fact that there had been a complete failure to take account of the specific situation of a defined economic group, namely the producers of milk. The fact that the exclusion of the producers from the allocation of a reference quantity was not foreseeable and was beyond the limits of ordinary economic risk made the breach all the more obvious (paras. 16 - 17).

8. A further consideration is the position taken by one of the Community institutions in the matter. It may be that one of the institutions has, to use the language of the court in the judgment in Factortame III, "contributed towards the omission:" [1996] Q.B. 404, 499, para. 56. In the present context this is not to be seen as bearing upon the third of the three necessary conditions for liability which the court has prescribed, namely the existence of a direct causal link between the breach and the damages sustained. Here it is a factor relating to the seriousness of the breach. As phrased in para. 56 it is presented as a mitigating factor and it is wide enough to include various kinds of actions on the part of the institution concerned. But it also includes the giving of information or advice and in that connection the factor could operate in either direction so far as the seriousness of the breach is concerned. Advice from the Commission that the state would not be acting in breach of Community law in taking a particular step would plainly be a mitigating factor. The decision to persist in a proposed step in the face of warnings from the Commission that the state would be in breach of Community law in so doing would add to the seriousness of the State's action.